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Saturday, February 11, 2017

Land Use Regulation and Housing

If you decrease housing regulations, would it lower the price of housing? Our condo may be torn down and replaced with high-rises which would cost 2-3 times as much as our present condo is worth. Oftentimes, when you de-regulate and allow for more development housing prices actually go up!

A reader referred me to a recent New York Times article about housing prices. It references a Wharton paper (in draft form!) which argues that housing prices would be far lower if land use regulations were less strict. There is a small nugget of truth in this, as well as a large nugget of bullshit. If we examine some markets - some I have personal experience with - their arguments make some sense. However, the laws of supply and demand do apply to Real Estate, and due to commuting distances, shortages in certain areas are created by geography, not merely zoning - as the Wharton paper admits.

I can tell you from personal experience that it doesn't cost a lot to build a house, particularly if you use your own labor. We put up a small house on our property to use as a pottery studio, and the basic house cost about $22,000 to build. Even if we assume another $25,000 for labor and finishing work, it is a small number compared to the prices that are charged for houses these days.

The cost of land is the big issue, of course. And when land is restrictively zoned, it effectively limits the amount of available land the same way geography does. But that doesn't mean that eliminating zoning necessarily drives down prices, as we shall see. And eventually, you do run into the hard limit of geography.

1. Oakland: I used to travel to silicon valley monthly, back in the day. And the entire area was prone to housing booms and busts, as the computer business boomed and waned. Today, silicon valley is now software valley, as all the chip-makers have largely moved to Arizona, Colorado, or Austin where land is cheaper and they could pay their Engineers less. Of course, housing in those communities is now skyrocketing, particularly in Austin. But in the bay area, demand for housing is still sky-high.

Query: Why, even in places where housing is in short supply, are there still run-down areas of town? Even in places like Key West, Florida, there are crappy neighborhoods chock-a-block with million-dollar homes. Well, in both cases, zoning and limits on construction do indeed create this oddity.

You may recall the recent fatal fire in Oakland, where a warehouse was being used as housing for some "artists" and as a performance space. It was zoned for neither. But since the amount of reasonably-priced real estate is very small, people basically resorted to illegal real estate. When you make something illegal, you merely drive that commerce underground. When you outlaw liquor, you create bootleggers and speakeasies. When you outlaw housing, people secretly live in warehouses.

If that seedy warehouse had been re-zoned for residential, the owner might have sold out to a developer who would have bulldozed it and put up condos. Yes, this is heresy in this day and age. But it would result in safe housing, not a firetrap.

But the ultimate problem is, the bay area is bisected by a bay, making commuting times beyond a certain distance, unreasonable. There is a finite amount of land in the area where you could build homes and still be within a reasonable commuting distance from work. And already, people have heroic commutes as it is.

So yes, you could free up some land by re-zoning, but no, this would not be a permanent solution, only a temporary one.

2. Key West: In Key West, a different regulation is the cause. The "ROGO" ordinance - Rate of Growth - means you have to apply to a lottery just to remodel your home. The entire keys are subject to variations of this law. In order to build a new house, you have to buy two or three lots, donate two of them to the County (as lots that will never be built on) in order to get your permit to build on one. In Key West proper, there are more regulations, designed to prevent the island city from becoming "gentrified" and forcing out lower-income people (because as we all know, living in a resort community at the price you want to pay is an inalienable right!). The net result is a lot of run-down housing stock next to fabulous photo-shoot dream homes. It is very odd.

But there are reasons for some of it. There is limited water and sewer capacity in the Keys. And if unlimited development were allowed, people would build on every inch of land. Visit coastal communities like Kitty Hawk, North Carolina, to see what I mean - houses nearly touching each other, built right on the barrier dunes, going back rows and rows. Too many houses for the water and sewer supplies, and all built on a spit of sand. And the presence of so many houses ruins what all those people came to see - a beautiful beach community.

And even if the Keys were to make the mistake of allowing unlimited development, it would not lower housing prices in the long run. Eventually every last square inch would be built on, and a permanent housing shortage would then develop. And the resulting sprawl would be a nightmare and destroy the area from an aesthetic and ecological point of view. And let's not even talk about Hurricanes!

This is the "geographical" limit the study's authors refer to. But the question is, should we let humanity build to the geographical limit or pull back at a level lower than that? It becomes a quality of life issue. Sure, we could wedge more housing into the bay area or Key West, but the end result is we would destroy the charm that attracts us to these places in the first place.

3. Jekyll Island: I presently live on an island with a built-in rate of growth ordinance. Approximately 2/3 of the island cannot be developed, leaving a lot of green space, maritime forests, and pristine empty beaches. Unlike the neighboring island, where nearly every inch of land is built on, we have wide open spaces here.

Ironically, housing prices are higher on our neighboring island, where you can build right on the water, and indeed, construction continues today. On our island, in order to build, you must first tear down. And after we tore down over five hotels, it has taken nearly a decade to rebuild some, and others are not slated to be completed for years to come. Still others are being replaced with housing - but only after nearly a decade of the land lying vacant for lack of any interested parties to build.

The irony of our island is that housing is very restricted, but the cost of housing, while expensive compared to the mainland, is far less expensive than other coastal resort islands. It turns out that a large segment of the population is very shallow and prefers to be crowded in areas with traffic lights, fast-food restaurants, traffic jams, and so forth - which the neighboring island has.

So maybe we are the exception to the rule, or maybe not. It is true that if the State of Georgia decided to change the law and open up 500 new lots for development, it would depress housing prices here. But given that there are few takers for the houses we presently have, maybe not so much.

Again, though, the law of supply-and-demand may be at work here. We are in a remote area that not many people appreciate. You can't commute to Google or Apple from here, except by computer. So it is an entirely different situation than San Francisco or Key West. But this doesn't explain why the neighboring island which encourages construction and growth has higher housing prices than our island, which has restrictive limits on construction and growth. Our Wharton friends are off-base here.

Note also that while we limit development to only 1/3 of the island, getting a permit to build the pottery studio wasn't that hard to do. In terms of development of existing developed lands, we have fairly few regulations and restrictions, which may factor in favor of the less regulation = lower prices theory.

4. Northern Virginia: We sold our house in Northern Virginia for twice market value because it sat astride two deeded lots. Since they were both deeded residential, it was perfectly legal to knock down the house and build two in its place. A neighbor even tried to fight this (to "save the neighborhood") but lost. Deeded is deeded, and can't be un-deeded.

Over the two decades we lived there, demand crept up, and eventually, what was once an undesirable farm field in 1949, "miles" from Old Town (about five!) was now an upscale neighborhood of million-dollar homes. Since there were no zoning issues, the entire neighborhood was bought out and redeveloped, and the population density doubled.

But a funny thing, housing prices didn't drop in half, they doubled. Our house was worth maybe $400,000 on a good day (a very good day) when we sold it as building lots for nearly $700,000. The developer put up two homes and sold them for nearly a million dollars each. So here is an example where free use of the land is allowed, and it had the opposite effect our Wharton pencil-necked pencil-pushers said it would. Housing costs went up, not down.

We still own a condominium in the area - next to the Huntington Metro. At one time, this complex, on 22 acres, was also considered "far out" from even Old Town, and certainly DC. But as the greater DC area has expanded, the land is now worth a lot more, and even the County realized that it could be put to better use and be more profitable for the county. Presently, it is run-down and although not crime-ridden, not necessarily a "good neighborhood". In our house near Mount Vernon, you could leave the keys in your car overnight. Where the condo is, people get their cars broken into.

The condo association paid substantial sums to attorneys to push through zoning changes to make the property zoned for mix-use medium high-rise. They want to put in high-rise condos and town homes, with some commercial space. Office space was also planned, but the developers want no part of it, as that portion of the market is saturated. We also had to pay for a traffic study as part of the re-zoning. All of this cost well into the six figures and some residents questioned why we should pay for this. But the idea was to make an attractive "package" for a developer who would buy us out with the certain knowledge of what he could do with the land.

And it may go through, too. A final vote is scheduled "soon". But the developer indicated that the new condos would start at about $500,000 each. Homeowners who thought they would get a "free condo" in the new buildings in exchange for their old ones, were disappointed. Currently, the existing condos sell for $150,000 to $250,000 depending on size, and this is with a premium because of the buyout. Re-zoning and more than doubling or tripling the population density has not resulted in lower housing prices, but higher ones. In fact, like with our house, the prices seem to track the increased population density - double density means double prices and so on.

5. St. Michael's Maryland: My parents built a "retirement home" for themselves on the shores of the Chesapeake bay. A lot of people were doing that, and locals became alarmed at the amount of development, much as people in Key West did. Acres of farmland were plowed under to make housing developments.

So they passed an ordinance that was designed to halt development in its tracks - houses could be built on tracts no less than five acres. That will show those developers! Because who in their right mind would build a development where each lot was five acres in size?

Guess what? They built anyway, and my parents had five acres of lawn to mow before they gave up and decided to let it go to weeds. Instead of slowing the consumption of agricultural land for housing developments, the regulation accelerated it. Now the developments took up hundreds of acres and dotted the land with mini-mansions spaced apart just far enough to be annoying. This insured the maximum amount of land was consumed in such a manner that it could never again be used for farming.

Did housing prices go up or down? It is hard to say, as the land there was, ironically, pretty cheap to begin with, which is why it became a popular place for retirees and weekenders to build houses, such as my parents did.

I am not sure if this example is relevant to the Wharton paper, but it illustrates how regulations can have unintended consequences. Some land-use proponents suggest that it would have been smarter to set aside land for agricultural use and concentrate housing into smaller "villages" rather than limit one house to five acres. A funny thing too, that proposal mimics what people have historically done with their lands, when left to their own devices!

6. Aurora, New York: We owned a house on five acres as well - deeded by a farmer who divided his corn field on the lake into lots for development. The problem was, he also attached a lot of covenants to the land, including covenants that it could not be subdivided or used for anything but residential purposes. Five acres is a lot of lawn to mow.

Worse yet, our neighbor had nearly 20 acres and the same restriction applied. He could not even put up a home for his Mother-In-Law without violating the zoning laws. But he could put up an ugly barn to store his boat and tractor. As a result, he never built a home on the property and the property wasn't worth much, in terms of resale value. No one wanted 20 acres you couldn't farm or subdivide.

So here, ironically, is an example where regulation doesn't make land more expensive, but cheaper. On the other hand, without these covenants, maybe he could have built houses on that land in 1/4-acre lots and sold them for cheap - thus "proving" the Wharton study's point. Sadly, demand for housing was so slack in that area that many homes were simply abandoned. So I am not sure that is a good example to use, as demand for land was low. It does illustrate the "baseline cost" of land for housing, that the study mentions.

* * *

I am not sure this "Wharton Paper" isn't just blowing smoke up our ass. It sounds to me like a preconceived notion from some Libertarians who want to "prove" that government regulations are always bad. I am not saying that zoning is always the best answer. Things like covenants and homeowners associations, as I have noted before, can backfire on you. Once viewed as elements that would enhance the value of property they often, in the long run, devalue property by limiting use of the land. And that sort of goes against what the authors are saying. Sometimes restrictive zoning makes properties worth less. And less restrictive zoning - as some of the examples above show - end up increasing property prices.

Maybe the paper's authors have a point. But I am not sure it is universal one. Eliminating all zoning regulations would result in chaos, and it would not necessarily lower the cost of housing. In crowded cities, it might free up some land for development. But like a one-time tax cut, it is not a permanent solution to anything. You just ratchet up the level of crowding until you once again run out of available land, only this time, more re-zoning won't free up more land and no more exists.

We have more restrictive zoning and building practices in crowded areas for a reason - because we don't want to live in the Kowloon Walled City. And a funny thing about that place, even though there were no regulations whatsoever there, it was not a cheap place to live in, in real terms. In fact, living there was a regular nightmare - which is why it no longer exists.